Sig, Inc., wishes to maintain a growth rate of 12 percent per year and a debt-eq

Question

Sig, Inc., wishes to maintain a growth rate of 12 percent per year and a debt-equity ratio of .43. The profit margin is 5.9 percent, and the ratio of total assets to sales is constant at 1.80.

What dividend payout ratio is necessary to achieve this growth rate under these constraints? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer as a percent rounded to the nearest whole number, e.g., 32.)

Is this growth rate possible?
Yes
No

  

What is the maximum sustainable growth rate possible given these constraints?

Explanation / Answer

Sustainable growth rate (SGR) is the growth that a company can maintain by using its own earning and without raising any additional financing either through debt or stock

SGR = Return on Equity * retention rate

Return on Equity = Net Income / Sales * Sales / Total Assets * Total Debt / Total Equity

Net Income / Sales = Profit margin which is given as 5.9% i.e 0.059

Sales / Total Assets is Assets turnover ratio, in this case we have provided with Total Assets / Sales of 1.8

Therefore, Sales / Total Assets = 1/1.8 = 0.56

Total Debt / total equity is debt to equity ratio which is given as 0.43

So, Return on Equity = 0.059*0.56*0.43 = 1.42%

SGR = Return on Equity * Retention Rate

SGR = 12%

12 = 1.42*Retention Rate

Retention rate = 12/1.42 = 845%

Therefore, it is not possible to achieve SGR of 12% given these constraints as a company can only retain maximum of 100% of its earnings not more than that.

By using these constraints, a company can only achieve that maximum SGR which is possible by retaining 100% of its earnings

Maximum SGR with these constrains = (1.42*100)/100 = 1.42%

By retaining 100% of its earnings a company can only sustain its return on Equity as Sustainable Gropwth rate.

Therefore, maximum SGR possible is 1.42%

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